Investors Chronicle: Treatt, Charles Stanley, Restaurant Group

BUY: Treatt (TET)

Shareholders could have expected a significant pullback in profitability if they were keeping an eye on citrus prices, but Treatt has negotiated this tricky period with aplomb, writes Alex Hamer.

The food and drink ingredient maker has turned in a strong transition year as it adjusts to a lower orange oil price. The dividend is up while an increase in capital expenditure reflects efforts to broaden the company’s non-citrus revenue streams.

The orange oil price is at a lull below $5 (£3.90) a kilogramme after staying above $10/kg for most of 2017 following a poor 2016 harvest, although supply levels are now keeping a lid on prices.

Treatt’s revenue was down 2 per cent on a constant currency basis year on year to £112.7m. As expected, the citrus division (54 per cent of group sales) was the main drag, with revenue down 10 per cent on the year before to £60.8m.

The second-largest contributor to group sales was the aroma and high impact chemicals division, which saw 16 per cent growth to £21.5m.

As Treatt has put cash into broadening its business, the net operating margin fell from 12.4 per cent (also the 2017 figure) to 12 per cent.

Chief executive Daemmon Reeve said the company had now “successfully decoupled” its financial performance from shifts in key citrus prices. Mr Reeve said its US expansion would bear fruit in the next year.

Consensus forecasts compiled by Bloomberg have Treatt’s cash profits rising from £14.6m in 2019 to £16.7m in full-year 2020.

HOLD: Charles Stanley (CAY)

We still have our doubts around efforts to cut costs, while boosting assets under management and the dividend, but margin improvement should provide some downside protection, writes Alex Newman.

Until this week, many market watchers had their doubts about Charles Stanley’s turnround plan. With the publication of the wealth manager’s half-year results, the year-to-date decline in the share price has been reversed and a repricing strategy has been largely vindicated.

Earlier this year, convinced that the benchmarked pricing strategy established by previous management failed to reflect high levels of customer satisfaction, chief executive Paul Abberley and his team decided to lift fees and shift to higher-margin services.

Although the effect won’t be compounded, the trick appears to have worked. Despite a meagre 2.1 per cent increase in funds under management in the six months to September, the revenue margin increased from 62.7 to 69.9 basis points, resulting in a 72 per cent leap in underlying pre-tax profits to £9.8m.

At the same time, the cost base remains a big focus. A three-year restructuring programme has so far concentrated on management changes, but has already yielded £800,000 in annualised savings at an initial outlay of £1.2m.

Of the remaining £8.3m restructuring budget, Mr Abberley is keen not to simply chase a “headcount drop, which can be toxic”.

Analysts at Peel Hunt expect adjusted earnings per share of 15.3p for the year to March 2020, rising to 20.9p in full-year 2021.

SELL: Restaurant Group (RTN)

We flagged the 10 per cent-plus growth as a bull point for Restaurant Group last month when its interim results came out. A fall to near the industry average is not a good sign, writes Alex Hamer.

The Restaurant Group’s hopes of quickly revitalising its portfolio through the £559m purchase of the Wagamama chain have been dealt a short-term blow after the pan-Asian chain’s quarterly growth fell to its lowest point since early 2017.

The company’s share price fell 9 per cent on the news, to 133p. Like-for-like growth in the three months to September was 6.3 per cent, down from 12.9 per cent in the previous quarter and 9.7 per cent in the year to March 30.

At the same time, Wagamama’s second-quarter numbers showed earnings increases, two new restaurant sites, a delivery kitchen and six Restaurant Group sites reopened as outlets of its flagship brand. Cost of sales were also up 9.6 per cent year on year, to £54m.

Chief executive Emma Woods said the company would keep expanding despite the wobbly dining sector. “We look forward to 2020, and while we don’t expect to be immune to the various headwinds facing our industry, we will stay true to our positive culture and growth mindset,” she said.

When Restaurant Group bought Wagamama it was seen as a renewal of the company, which listed on the London Stock Exchange 50 years ago. The acquisition added significant debt and capital expenditure requirements, as the new owner said casual dining demand would support 40 to 60 new Wagamama restaurants. Investors have not yet come round as the company’s share price has fallen from over 200p when the deal was announced.

Mark Robinson: Making a meal of casual dining

You will often hear the line that most single-establishment restaurants go belly up within their first 12 months of trading. But what academic studies there have been, as opposed to anecdotal accounts, indicate that this is simply untrue.

In the internet age, scuttlebutt morphs into received wisdom as if by osmosis. But the claim that restaurants are inherently risky compared to other businesses doesn’t sit easily with the fact that the hospitality industry has consistently been one of the growth areas of the economy since the mid-1970s.

So it seems peculiar that industry analysts feign surprise when a restaurant chain goes to the wall. A certain rate of attrition is to be expected given that casual dining brands have grown at a phenomenal clip, with the number of managed restaurants up by 27.3 per cent over the past five years.

Activity and aggregate demand within the hospitality industry will always wax and wane in alignment with the credit cycle and — by extension — levels of discretionary spending. Sales of “lifestyle products” — a key indicator of discretionary spending — have been flat since the first quarter of 2018.

It follows, therefore, that casual diners will be feeling the pinch. The reality is that restaurants are simply operating at the wrong end of the consumer credit cycle, a point borne out by the last edition of the Market Growth Monitor from CGA and AlixPartners, which indicated that UK restaurant numbers had fallen for a sixth successive quarter by the end of June.

Even though the accommodation and food services industries reported the largest increase in underlying insolvency volumes in 12 months to the end of September, the construction industry suffered the highest number of new underlying insolvencies — it’s just not as newsworthy (at least to the dailies).

At any rate, the Market Growth Monitor shows that family-owned, independent restaurants have been closing at a faster rate than the high street chains. And there has been a marked switch in diner preferences, with familiar cuisines such as Chinese and Indian giving way to other Asian flavours, most notably Thai.

Family-owned independent restaurants don’t possess the same buying power or economies of scale as the chains and you suspect that they’re disproportionately impacted by rising business rates. But it may be that some chains have an effective half-life, at least those which come into being in response to short-term consumer trends, or where arm’s length management doesn’t deliver a pleasurable — or commercially viable — dining experience (think Jamie’s Italian).

The likes of Pret A Manger and Greggs have proved successful — and long-lasting — because, among other factors, they have a clear idea of which consumers they’re targeting. But, above all, the business models are readily scalable, a prerequisite for success given that they’re both engaged in volume trading.